Many businesses engaged in the provision of ‘exempt’ supplies for VAT purposes (such as healthcare or financial services) or those with a turnover below the VAT registration threshold (currently £83,000 per annum) believe that they will never have to register for VAT, or pay VAT.

In the majority of cases, this is true. There are, however, instances in which businesses with sales that are exempt from VAT or which have a turnover below the VAT threshold do have to register for, and pay, VAT, and failure to do so may lead to penalties and interest becoming payable.

The main trap is likely to catch businesses making exempt supplies which acquire goods or services from outside the UK. When this is the case, the goods and services bought from abroad are treated as if they are the UK turnover of the business. For example, an insurance broker who contracts out a £100,000 software project to India would have to register for VAT and account for the cost of the project as part of its own (standard-rated) turnover, accounting for the VAT which would be due as if it were a sale.

The VAT rule which applies exists (in effect) to prevent such businesses obtaining an artificial tax advantage by sourcing goods and services from jurisdictions in which VAT would not be charged on the sale.

Similarly, a trader who is not registered for VAT but which purchases goods or services from abroad must add the value of those goods or services to its own turnover to determine whether or not it has to register for VAT. If it takes it above the threshold, it must register and account for the deemed VAT on the ‘sale’.

The situation is further complicated by rules which require VAT registration to be undertaken in some circumstances in anticipation of turnover crossing the VAT registration threshold and by the fact that failing to register brings a penalty if discovered. Furthermore, the ‘back VAT’ can be claimed for up to 20 years.